ACCA DipIFR question papers and answers on IAS 41 from June 2014

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All questions on IAS 41 Agriculture which have appeared in ACCA DipIFR from June 2014 have been indexed here. The answers are based on the standards prevalent at the exam point in time.

For the benefit of the readers, we have put the following sequentially to help them understand better

• Question - Relevant portion of the exam pertaining to the standard has been recreated
• Answer - Answers as shared by the ACCA Examination team which was required for the question
• Examiners Feedback - Feedback on answers given by the students for that exam, this is a critical part of learning as students can learn from mistakes which other students did

ACCA Past Question papers June 2014 (12 marks)

Question :

You are the financial controller of Omega, a listed company which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Your managing director, who is not an
accountant, has recently attended a seminar and has the following questions for you concerning issues raised at the seminar:

One of the delegates at the seminar was a director of an entity which operates a number of different farms. She informed me that there was a financial reporting standard which applied to farming entities. I think she said it was IAS 41. I’d like to know why a special standard is needed for farming entities. Given that we have IAS 41, does this mean that other IFRSs do not apply to farming entities? Please explain the main recognition and measurement requirements of IAS 41 – I’m not interested in details about disclosures. I am interested, though,
in any areas where the provisions of IAS 41 differ from general IFRSs. I believe I heard that farming entities treat grants from the government in a different way than other entities do. I’m particularly interested to hear about this, assuming I’m correct.

ACCA Answer: 

It is not true that, given the existence of IAS 41 – Agriculture – other IFRSs do not apply to farming companies. The general presentation requirements of IAS 1 – Presentation of Financial Statements, together with the specific recognition and measurement requirements of other IFRSs, apply to farming
companies just as much as others.

IAS 41 deals with agricultural activity. Two key definitions given in IAS 41 are biological assets and agricultural produce. A biological asset is a living animal or plant. Examples of biological assets would be sheep and fruit trees.  The criteria for the recognition of biological assets are basically consistent with other IFRSs, and are based around the Framework definition of an asset.

A key issue dealt with in IAS 41 is that of measurement of biological assets. Given their nature (e.g. lambs born to sheep which are existing assets, the use of cost as a measurement basis is impracticable.  The IAS 41 requirement for biological assets is to measure them at fair value less costs to sell. Changes in fair value less costs to sell from one period to another are recognised in profit or loss. 
Agricultural produce is the harvested produce of a biological asset. Examples would be wool (from sheep) or fruit (from fruit trees). 

The issue of measuring ‘cost’ of such assets is similar to that for biological assets. IAS 41 therefore requires that ‘cost’ should be fair value less costs to sell at the point of harvesting. This figure is then the deemed ‘cost’ for the purposes of IAS 2 – Inventories. 
A consequence of the above treatment is that government grants receivable in respect of biological assets are not treated in the way prescribed by IAS 20 – Government Grants. Where such a grant is unconditional, it should be recognised in profit or loss when it becomes receivable. If conditions attach to the grant, it should be recognised in profit or loss only when the conditions have been met. 

The IAS 20 treatment of grants is to recognise them in profit or loss as the expenditure to which they relate is recognised. This means that recognition of grants relating to property, plant and equipment takes place over the life of the asset rather than when the relevant conditions are satisfied.

ACCA Examiners feedback on answers given by students

This question was not answered well by the majority of candidates attempting it and indeed a reasonable number of candidates did not attempt it at all. As has already been noted in this report, this may be indicative of the fact that these subjects have been regarded as ‘fringe’ topics and not studied diligently by many candidates. It is very important for candidates to ensure that they have studied the whole of the syllabus.

Part (a) required candidates to explain the applicability of general international financial reporting standards (IFRS) to farming entities and also to outline the main recognition and measurement issues outlined in IAS 41. Candidates were specifically asked about the way government grants relating to agricultural activity need to be accounted for. A number of candidates incorrectly stated that other
IFRS do not apply to farming entities. The majority of candidates incorrectly stated that government grants for agricultural activity are accounted for in the same way as other government grants. Most candidates did have some awareness of the concept of a biological asset, and the difficulty of applying
the cost concept to the measurement of such an asset. However the general level of knowledge displayed in this part was rather disappointing.

ACCA Past Question papers June 2016 (5 marks)

Question

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review she has prepared a series of queries relating to those statements: 

‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial statements. Please explain this to me.’

Answer

A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal. The majority of non-biological assets of an entity have an initial acquisition cost which can be computed with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born calf) this is often not the case. 

For the vast majority of biological assets their initial measurement should be at its fair value less costs to sell. Gains or losses arising from such initial measurement should be recognised in profit or loss. As the biological asset transforms and its fair value less costs to sell changes, the carrying amount of the asset should be updated with changes being recognised in profit or loss.

Examiners Feedback

This question was very popular and generally quite well answered.
Most candidates know that the initial measurement of biological assets should be at its fair value less costs to sell and that further gains or losses should be recognized in profit or loss. Some candidates wrote much about biological transformation and changes in fair value but forgot to mention that those changes less costs to sell are to be recognized in profit or loss. Only a few candidates mentioned that it was necessary to disclose changes in fair value related to
the qualitative changes and to changes in market prices.

ACCA Past Question papers June 2015 (5 marks)

Question:

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an
accountant, has recently attended a business seminar at which financial reporting issues were discussed. Following the seminar, she reviewed the financial statements of Omega for the year ended 31 March 2016. Based on this review
she has prepared a series of queries relating to those statements:

Query
‘Another issue discussed at the seminar was financial reporting by farming entities. The issue of ‘biological assets’ was mentioned. I don’t really understand what these are or how they’re recognised and measured in the financial
statements. Please explain this to me.’

ACCA Answer: 

A biological asset is defined in IAS 41 – Agriculture – as a living plant or animal. 1
The majority of non-biological assets of an entity have an initial acquisition cost which can be computed with sufficient reliability to be used as its initial carrying value. For biological assets (e.g. a new born calf) this is often not the case.

(Note: Exact words NOT needed here, just the sense of the point.)

For the vast majority of biological assets their initial measurement should be at its fair value less costs to sell. Gains or losses arising from such initial measurement should be recognised in profit or loss.  As the biological asset transforms and its fair value less costs to sell changes, the carrying amount of the asset should be updated with changes being recognised in profit or loss.

ACCA Examiners feedback on answers given by students

Query two for 5 marks required to briefly explain how biological assets are recognized and measured in the financial statements. This question was very popular and generally quite well answered. Most candidates know that the initial measurement of biological assets should be at its fair value less costs to sell and that further gains or losses should be recognized in profit or loss.

Some candidates wrote much about biological transformation and changes in fair value but forgot to mention that those changes less costs to sell are to be recognized in profit or loss. Only a few candidates mentioned that it was necessary to disclose changes in fair value related to the qualitative changes and to changes in market prices.

ACCA Past Question papers June 2019)

Question :

You are the financial controller of Epsilon, a listed entity. The financial statements of Epsilon for the year ended 31 March 20X7 are currently being prepared. Your managing director has sent you three questions regarding the financial statements. 

I’ve recently been reviewing the financial statements of one of our subsidiaries. This subsidiary specialises in both dairy farming and beef farming. There are amounts included in both non-current and current assets:
– The non-current assets include farm machinery which has been purchased. I understand why this machinery has been included as we have spent money on it. However, the non-current assets figure also includes a figure for the
dairy and beef herds. These existing herds were not purchased but are made up of animals the farming subsidiary has bred.
– The inventories include amounts for milk and beef. The milk comes from the dairy herd and the beef comes from the animals we have slaughtered.
– Is there an international financial reporting standard which deals with these issues and how does it require the subsidiary to value and account for the herds and the inventories?

Answer:

There is an international financial reporting standard which is particularly applicable to entities such as farming companies. The standard is IAS 41 – Agriculture. 

IAS 41 would regard a dairy or beef herd as an example of a biological asset. A biological asset is a living plant or animal. 

Given the impracticability of measuring the cost of biological assets, IAS 41 requires that they should be measured at each reporting date at their fair value less costs to sell, provided that fair value can be measured reliably. Gains and losses are reported in profit or loss. 

Dairy and beef cows are regularly bought and sold and therefore there should be no problem in determining their fair value which will be equivalent to market value. This would allow the calculation of the carrying amount of the dairy and beef herd in the non-current assets of the subsidiary. 

IAS 41 would regard milk and beef as agricultural produce. Agricultural produce is ‘harvested’ from the biological asset. In the case of the dairy herd, the ‘harvesting’ is the milking of the cows and in the case of the beef herd, the ‘harvesting’ is the slaughtering of the beef cows. 

IAS 41 requires that agricultural produce be initially measured based on fair value at the point of harvesting. This then forms the ‘cost’ for the purposes of subsequently applying IAS 2 – Inventories.

ACCA Past Question papers Sep 20 (12 marks)

Question :

Answer:

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